By now you are probably aware that this past year was the smallest calf crop since 1950. Feedlot numbers had been holding their own due to drought, heifer feeding and general pulling ahead of cattle. This caught up with the industry with the May 1 USDA Cattle on Feed report. In that report cattle on feed numbers were less than the previous year for the first time in several months, a sign of things to come.
This sets up a competitive scramble for the available cattle. So who will feed the cattle in the future? Depending on where you sit and what your biases are, there are several answers that question. However, most answers will boil down to efficiency, economy (of size and scale) and complementarity.
Economy of size is difficult to evaluate because the answer differs depending on management. For example, the size of feedlot necessary to efficiently operate a feed mill that includes flaking capabilities is larger than one without. Manure management and efficient distribution may be a disincentive to increased feedlot size since it increases the distance that the manure needs to be hauled for distribution. Nonetheless, clearly the long term trend is for larger feedlots.
Complementarity here refers to two operational components or businesses that mutually fulfill needs of the other, as in horizontal and vertical industry integration. Some of the consolidation that has occurred at the larger end of our industry is related to increased ownership of cattle and feedlots by the packing industry. This reduces risk in a narrow margin business and ensures consistent supplies of fed cattle.
However integration can also occur with the cow-calf and feedlot sector (retained ownership) and the grain and feedlot sector (farmer feeders). Feedlots that own farming or crop production enterprises also spread risk and may be able to competitively source feed costs. This of course is an inherent advantage of feedlots in the Corn Belt. Retained ownership allows cow-calf producers to take advantage of their genetics and management and capitalize on profitability in the feeding sector when cow-calf margins are negative.
One current issue that is being discussed is the fate of small (<1,000 head) feedlots. Most of these operations are farm feedlots with grain operations. They tend to be seasonal, often feeding one group per year. For example, on Sept. 1, 2011, the number of cattle on feed in small and large feedlots in Iowa was equal. However, by Feb. 1 there were 11-12% more cattle in small feedlots.